Roth IRA

The end of an era has arrived for undoing Roth conversions

Share

Whether you call it a do-over or a recharacterization, the end of an era has arrived for undoing a Roth conversion.

Used to be, if you converted a traditional IRA to a Roth IRA but then discovered the conversion really wasn’t so advantageous for your situation, you could undo it. Our friends at the IRS refer to this process as recharacterization. Others simply call it a do-over. Regardless of what you call it, with the passage of the Tax Cuts and Jobs Act of 2018, a conversion from a traditional IRA, SEP or SIMPLE to a Roth IRA in 2018 and beyond cannot be recharacterized. A Roth IRA conversion made in 2017 may still be recharacterized to a contribtion to a traditional IRA, but just for a short time.

 Conversion Date  Recharacterization Allowed
Jan. - Dec. 2017   Yes, by Oct. 15, 2018
 Jan. 1, 2018 or later  No


If you’ve converted to a Roth IRA and have questions about the change brought about by the Tax Cuts and Jobs Act, a Waddell & Reed financial advisor would be happy to answer your questions and discuss your situation.

Roth IRAs still going strong

While the recharacterization situation presents an unfavorable consequence for some investors, the Roth IRA is still a popular retirement plan option. In fact, 2018 marks the 20th anniversary of the Roth IRA. To celebrate, here are some facts to help consider the Roth IRA as part of your retirement strategy.

  • Roth IRAs offer the benefit of tax-free earnings when you follow the rules. With a Roth IRA, you can look forward to tax-free distributions when you retire. If the withdrawal is made before age 59½ and doesn't exceed the amount that has been contributed to the Roth IRA over the years, then no income tax is charged. Withdrawals of contributions are tax-free.
  • 24.9 million American households had a Roth IRA in 2017 (Source: Invenstment Company Institute).
  • You can contribute to a Roth IRA at any age.
  • If you are young, a Roth IRA can be a smart strategy because you will have years to let your earnings accumulate and potentially grow tax free.
  • Minors also can contribute to a Roth IRA if they have earned income, such as wages from a summer job
  • For 2018, the maximum Roth IRA contribution is $5,500 for those under age 50 and $6,500 for those age 50 and older.
  • There are income limits for Roth IRA contributions. If you are single, your ability to contribute will begin to phase out when your income exceeds $120,000 ($189,000 if married filing jointly).
  • You can convert a traditional IRA to a Roth IRA, and no income limits apply. You first should talk with a Waddell & Reed financial advisor or a tax advisor to determine if potential future tax-free earnings outweigh the tax bill you will pay on the conversion.
  • While the benefits of conversion may be more apparent for younger people, being older should not rule out conversion. It can be a smart estate planning strategy. By converting, you can leave your retirement funds to your beneficiaries potentially tax free and they can stretch tax-free distributions for years from the inherited Roth IRA.
  • Roth IRAs are never subject to required minimum distributions (RMDs) during the owner’s lifetime.
  • Your Roth IRA beneficiaries must take RMDs. However, those distributions are generally tax free as long as you held the account for more than five years.

The future looks bright for the Roth IRA. Roth accounts have grown in number and balance size over the past 20 years, and they are expected to play a bigger role in the future. The trend in Congress when discussing retirement savings is toward more “Rothification.”

Need more insight? Let us be your guide.

Our national network of experienced financial advisors can help you create a personalized plan to help you identify financial goals and get you where you want to go in life.

Find an Advisor

Withdrawals of earnings in your Roth IRA prior to age 59½ and before the account is 5 years old may be subject to a 10% early withdrawal penalty.

This information is prepared by an independent third party, Broadridge Investor Communication Solutions, Inc. and is provided for informational and educational purposes only. Waddell & Reed believes the information has been obtained from sources considered to be reliable, but does not guarantee the accuracy of the information provided. This information is not meant to be a complete summary or statement of all available data necessary for making financial or investment decisions and does not constitute a recommendation.

Please note that the information provided may include references to concepts that have legal, accounting and tax implications. It is not to be construed as legal, accounting or tax advice, and is provided as general information to you to assist in understanding the issues discussed. Neither Waddell & Reed, Inc., nor its Financial Advisors give tax, legal, or accounting advice.

This information is not meant as financial or investment advice pertaining to your personal situation. The selection of appropriate investment, insurance or planning options and/or strategies should be made on an individual basis after consultation with appropriate legal, tax and financial advisors. Nothing contained herein is intended as a solicitation or an offer to buy or sell any product or service mentioned and they may not be suitable for all investors. Securities offered through Waddell & Reed, Inc., Member FINRA/SIPC, are not insured by FDIC, NCUA or any other government agency, are not deposits or obligations of the financial institution, are not guaranteed by the financial institution, and are subject to risks, including the possible loss of principal. Insurance products are offered through insurance companies with which Waddell & Reed has sales arrangements. Guarantees provided by insurance products are subject to the claims-paying-ability of the issuing insurance company.

Securities offered through Waddell & Reed, Inc., Member FINRA/SIPC, are not insured by FDIC, NCUA or any other government agency, are not deposits or obligations of the financial institution, are not guaranteed by the financial institution, and are subject to risks, including the possible loss of principal. Insurance products are offered through insurance companies with which Waddell & Reed has sales arrangements. Guarantees provided by insurance products are subject to the claims-paying-ability of the issuing insurance company.